The government is to introduce a cap on the cost of payday loans.
The level of the cap will be decided by the Financial COnduct Authority (FCA), the new industry regulator, but is expected to target firms like Wonga and MyJar which offer short-term loans at more than 1000% APR. The new laws will target the interest rates as well as the arrangement and penalty fees paid by borrowers.
The cap will be established through amendments to the banking Reform Bill which is already going through Parliament.
The industry has warned that this move would restrict access to credit for many people and push them towards illegal lending houses and “loan sharks”. However, the government says that they have learned lessons from the introduction of similar caps in other countries like Australia, and the legislation would protect consumers
Chancellor of the Exchequer, George Osborne said:
We have created a powerful new consumer regulator to regulate the payday lending industry and now we’re asking them to set a cap on the cost of credit. That will make sure that hardworking people are served by the banking system. It is a far change from the situation we inherited, where the industry was almost entirely unregulated.
We’re going to have a cap on the total cost of credit – we’re looking at the whole package, not just the interest fee, but also the arrangement fees as well as the penalty fees. This is all about having a banking system that works for hardworking people and making sure some of the absolutely outrageous fees and unacceptable practices are dealt with. It’s all about the government being on the side of hardworking people.
Financial Secretary to the Treasury, Sajid Javid, said:
The government is determined to protect hardworking people from sharp practice in the financial sector. The payday loan sector must get its house in order and extortionate costs must become a thing of the past. That is why the government is legislating to cap the total cost of payday loans.
